CARDINAL FINANCIAL CORP - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-QSB

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2002

Commission File No. 0-24557

CARDINAL FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)

Virginia
(State or other jurisdiction of
incorporation or organization)

54-1874630
(I.R.S. Employer
Identification No.)

10555 Main Street, Suite 500, Fairfax, Virginia, 22030
(Address of principal executive offices)

Issuer's telephone number including area code: (703) 934-9200

Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months Yes ý No

On November 12, 2002, there were 10,044,345 shares of Cardinal Financial Corporation Common Stock, par value $1.00 per share, outstanding.

Transitional Small Business Disclosure Format: Yes No ý

CARDINAL FINANCIAL CORPORATION

INDEX TO FORM 10-QSB

PART I—FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
	Consolidated Statements of Condition September 30, 2002 and December 31, 2001	1
	Consolidated Statements of Operations For the three and nine months ended September 30, 2002 and 2001	2
	Consolidated Statements of Comprehensive Income (Loss) For the three and nine months ended September 30, 2002 and 2001	3
	Consolidated Statements of Changes In Shareholders' Equity For the nine months ended September 30, 2002 and 2001	4
	Consolidated Statements of Cash Flows For the nine months ended September 30, 2002 and 2001	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Controls and Procedures	26
PART II—OTHER INFORMATION		27
Item 1.	Legal Proceedings	27
Item 2.	Changes in Securities	27
Item 3.	Defaults Upon Senior Securities	27
Item 4.	Submission of Matters to a Vote of Security Holders	27
Item 5.	Other Information	28
Item 6.	Exhibits and Reports on Form 8-K	28
SIGNATURES AND CERTIFICATIONS		29

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
September 30, 2002 and December 31, 2001
(Dollars in thousands, except share data)

		(Unaudited) September 30, 2002			December 31, 2001
Assets
Cash and due from banks		$	25,729		$	11,446
Federal funds sold			61,186			23,013

	Total cash and cash equivalents		86,915			34,459
Investment securities available-for-sale			137,945			34,147
Other investments			1,263			1,268
Loans held for sale			—			4,732
Loans receivable, net of fees			216,355			200,911
Allowance for loan losses			(3,073	)		(3,104	)

			213,282			197,807
Premises and equipment, net			4,610			5,077
Goodwill and other intangibles			646			668
Accrued interest and other assets			2,141			1,426

	Total assets	$	446,802		$	279,584

Liabilities and Shareholders' Equity
Deposits		$	403,668		$	246,024
Other borrowed funds			1,000			9,824
Accrued interest and other liabilities			1,404			3,112

	Total liabilities		406,072			258,960
Preferred stock, $1 par value, 10,000,000 shares authorized Series A preferred stock, cumulative convertible, 1,364,686 and 1,364,714 shares outstanding in 2002 and 2001, respectively			1,365			1,365
Common stock, $1 par value, 50,000,000 shares authorized, 10,044,345 and 4,294,323 shares outstanding in 2002 and 2001, respectively			10,044			4,294
Additional paid-in capital			51,231			38,488
Accumulated deficit			(24,358	)		(23,249	)
Accumulated other comprehensive income (loss)			2,448			(274	)

	Total shareholders' equity		40,730			20,624

	Total liabilities and shareholders' equity	$	446,802		$	279,584

See accompanying notes to consolidated financial statements.

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended September 30, 2002 and 2001
(Dollars in thousands, except per share data)
(Unaudited)

			Three Months Ended September 30,					Nine Months Ended September 30,
			2002		2001			2002			2001
Interest income:
	Loans receivable		$	3,737	$	3,879		$	10,967		$	11,074
	Federal funds sold			260		218			613			926
	Investment securities available-for-sale			1,471		95			3,284			285
	Other investments			17		22			53			66

		Total interest income		5,485		4,214			14,917			12,351
Interest expense:
	Deposits			2,603		1,703			6,834			5,335
	Other borrowed funds			40		122			208			368

		Total interest expense		2,643		1,825			7,042			5,703

		Net interest income		2,842		2,389			7,875			6,648
Provision for loan losses				95		190			134			375

		Net interest income after provision for loan losses		2,747		2,199			7,741			6,273
Non-interest income:
	Service charges on deposit accounts			133		102			363			271
	Loan service charges			91		144			286			349
	Investment fee income			188		472			754			1,560
	Net gain on sales of loans			3		2			50			14
	Net gain on investment securities available-for-sale			121		—			121			—
	Net gain on sales of other assets			—		1			39			5
	Other income			192		133			553			277

		Total non-interest income		728		854			2,166			2,476
Non-interest expense:
	Salary and benefits			1,368		1,963			4,176			5,801
	Occupancy			367		344			1,002			1,027
	Professional fees			235		192			727			450
	Depreciation			176		210			555			596
	Writedown on WorldCom bond			—		—			1,660			—
	Amortization of intangibles			—		173			22			523
	Other operating expenses			900		877			2,503			2,626

		Total non-interest expense		3,046		3,759			10,645			11,023

		Net income (loss) before income taxes		429		(706	)		(738	)		(2,274	)
Provision for income taxes				—		—			—			—

Net income (loss)			$	429	$	(706	)	$	(738	)	$	(2,274	)

Dividends to preferred shareholders				124		128			371			384

Net income (loss) to common shareholders			$	305	$	(834	)	$	(1,109	)	$	(2,658	)

Basic and diluted earnings (loss) per common share			$	0.03	$	(0.20	)	$	(0.15	)	$	(0.62	)

Weighted-average common shares outstanding — basic				10,044,345		4,256,797			7,243,053			4,255,432

Weighted-average common shares outstanding — diluted				10,142,930		4,256,797			7,243,053			4,255,432

See accompanying notes to consolidated financial statements.

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the three and nine months ended September 30, 2002 and 2001
(Dollars in thousands)
(Unaudited)

		Three Months Ended September 30,					Nine Months Ended September 30,
		2002		2001			2002			2001
Net income (loss)		$	429	$	(706	)	$	(738	)	$	(2,274	)
Other comprehensive income:
	Unrealized gain on available-for-sale investment securities		1,581		62			2,722			—

Comprehensive income (loss)		$	2,010	$	(644	)	$	1,984		$	(2,274	)

See accompanying notes to consolidated financial statements.

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the nine months ended September 30, 2002 and 2001
(Dollars in thousands)
(Unaudited)

	Preferred Shares	Preferred Stock		Common Shares	Common Stock		Additional Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total
Balance, December 31, 2000	1,411	$	1,411	4,253	$	4,253	$	38,466	$	(10,022	)	$	4		$	34,112
Issuance of stock awards	—		—	3		3		3		—			—			6
Stock options exercised	—		—	1		1		3		—			—			4
Dividends on preferred stock	—		—	—		—		—		(384	)		—			(384	)
Net loss	—		—	—		—		—		(2,274	)		—			(2,274	)

Balance, September 30, 2001	1,411	$	1,411	4,257	$	4,257	$	38,472	$	(12,680	)	$	4		$	31,464

Balance, December 31, 2001	1,365	$	1,365	4,294	$	4,294	$	38,488	$	(23,249	)	$	(274	)	$	20,624
Dividends on preferred stock	—		—	—		—		—		(371	)		—			(371	)
Rights offering shares issued	—		—	2,437		2,437		5,462		—			—			7,899
Public offering shares issued	—		—	3,313		3,313		7,281		—			—			10,594
Change in unrealized gain on investment securities available-for-sale	—		—	—		—		—		—			2,722			2,722
Net loss	—		—	—		—		—		(738	)		—			(738	)

Balance, September 30, 2002	1,365	$	1,365	10,044	$	10,044	$	51,231	$	(24,358	)	$	2,448		$	40,730

See accompanying notes to consolidated financial statements.

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2002 and 2001
(Dollars in thousands)
(Unaudited)

				2002			2001
Cash flows from operating activities:
	Net loss			$	(738	)	$	(2,274	)
	Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
		Depreciation			555			596
		Amortization of intangibles, premiums and discounts			626			548
		Provision for loan losses			134			375
		Originations of loans held for sale			(4,369	)		—
		Proceeds from the sale of loans held for sale			9,038			—
		Writedown on WorldCom bond			1,660			—
		Gain on sale of loans held for sale			(50	)		(14	)
		Gain on sale of investment securities available-for-sale			(121	)		—
		Gain on sale of other assets			(39	)		(5	)
		Increase in accrued interest and other assets			(715	)		(125	)
		Increase (decrease) in accrued interest and other liabilities			(1,708	)		889
		Compensation related to stock awards			—			6

			Net cash provided by (used in) operating activities		4,273			(4	)

Cash flows from investing activities:
	Purchase of premises and equipment				(88	)		(412	)
	Proceeds from sale of premises and equipment				—			12
	Proceeds from sale, maturity and call of investment securities available-for-sale				16,053			4,500
	Proceeds from sale of other investments				188			349
	Purchase of investment securities available-for-sale				(131,129	)		(3,601	)
	Purchase of other investments				(184	)		(114	)
	Redemptions of investment securities available-for-sale				11,736			1,043
	Net increase in loans receivable				(15,335	)		(42,448	)

			Net cash used in investing activities		(118,759	)		(40,671	)

Cash flows from financing activities:
	Net increase in deposits				157,644			49,279
	Net increase (decrease) in other borrowed funds				(8,824	)		4,069
	Proceeds from rights offering				7,899			—
	Proceeds from public offering				10,594			—
	Dividends on preferred stock				(371	)		(384	)
	Stock options exercised				—			4

			Net cash provided by financing activities		166,942			52,968

Net increase in cash and cash equivalents					52,456			12,293
Cash and cash equivalents at beginning of period					34,459			29,488

Cash and cash equivalents at end of period				$	86,915		$	41,781

Supplemental disclosure of cash flow information:
		Cash paid during period for interest		$	6,947		$	5,693

See accompanying notes to consolidated financial statements.

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)

Note 1

Organization

Cardinal Financial Corporation (the "Company") was incorporated November 24, 1997 under the laws of the Commonwealth of Virginia as a holding company whose activities consist of investment in its wholly-owned subsidiaries. In addition to Cardinal Bank, N.A., which began operations in 1998, the Company opened the following three subsidiaries in 1999: Cardinal Wealth Services, Inc., an investment subsidiary (as of February 1, 1999); Cardinal Bank—Manassas/Prince William, N.A. (as of July 26, 1999); and Cardinal Bank—Dulles, N.A. (as of August 2, 1999). On September 1, 2000, the Company completed its acquisition of Heritage Bancorp, Inc. and its banking subsidiary, The Heritage Bank, headquartered in McLean, Virginia. The Heritage Bank was renamed and became the Company's fourth banking subsidiary, Cardinal Bank—Potomac. On November 1, 2001, the Company consolidated two of its banking subsidiaries, Cardinal Bank—Dulles, N.A. and Cardinal Bank—Potomac, into Cardinal Bank, N.A. On March 1, 2002, the Company consolidated Cardinal Bank—Manassas/ Prince William, N.A. into Cardinal Bank, N.A., now the Company's only remaining banking subsidiary.

Basis of Presentation

In the opinion of management, the accompanying consolidated financial statements have been prepared in accordance with the requirements of Regulation S-X, Article 10. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. However, all adjustments that are, in the opinion of management, necessary for a fair presentation have been included. The results of operations for the three and nine months ended September 30, 2002 are not necessarily indicative of the results to be expected for the full year ending December 31, 2002. The unaudited interim financial statements should be read in conjunction with the audited financial statements and notes to financial statements that are presented in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2001.

Note 2

Segment Disclosures

The Company operates and reports in two business segments, banking and investment advisory services. The banking segment includes both commercial and consumer lending and provides customers products such as commercial loans, real estate loans, other business financing and consumer loans. In addition, this segment also provides customers with several choices of deposit products, including demand deposit accounts, savings accounts and certificates of deposit. The investment advisory services segment provides advisory services to businesses and individuals, including financial planning and retirement/estate planning.

Information about reportable segments, and reconciliation of such information to the consolidated financial statements as of and for the three and nine months ended September 30, 2002 and 2001, follows:

For the Three Months Ended September 30, 2002:

	Banking		Investment Advisory			Intersegment Elimination			Other			Consolidated
	(Dollars in thousands)
Net interest income	$	2,810	$	—		$	—		$	32		$	2,842
Provision for loan losses		95		—			—			—			95
Non-interest income		505		188			—			35			728
Non-interest expense		2,725		223			—			98			3,046

Net income (loss)	$	495	$	(35	)	$	—		$	(31	)	$	429

Total Assets	$	443,511	$	332		$	(38,192	)	$	41,151		$	446,802

For the Nine Months Ended September 30, 2002:

	Banking			Investment Advisory			Intersegment Elimination			Other			Consolidated
	(Dollars in thousands)
Net interest income	$	7,824		$	—		$	—		$	51		$	7,875
Provision for loan losses		134			—			—			—			134
Non-interest income		1,244			756			—			166			2,166
Non-interest expense		9,246			914			—			485			10,645

Net loss	$	(312	)	$	(158	)	$	—		$	(268	)	$	(738	)

Total Assets	$	443,511		$	332		$	(38,192	)	$	41,151		$	446,802

For the Three Months Ended September 30, 2001:

	Commercial Banking			Investment Advisory			Intersegment Elimination			Other			Consolidated
	(Dollars in thousands)
Net interest income	$	2,387		$	—		$	—		$	2		$	2,389
Provision for loan losses		190			—			—			—			190
Non-interest income		350			474			—			30			854
Non-interest expense		2,671			480			—			608			3,759

Net loss	$	(124	)	$	(6	)	$	—		$	(576	)	$	(706	)

Total Assets	$	255,252		$	421		$	(29,355	)	$	32,319		$	258,637

For the Nine Months Ended September 30, 2001:

	Commercial Banking			Investment Advisory			Intersegment Elimination			Other			Consolidated
	(Dollars in thousands)
Net interest income	$	6,623		$	—		$	—		$	25		$	6,648
Provision for loan losses		375			—			—			—			375
Non-interest income		875			1,564			—			37			2,476
Non-interest expense		7,761			1,597			—			1,665			11,023

Net loss	$	(638	)	$	(33	)	$	—		$	(1,603	)	$	(2,274	)

Total Assets	$	255,252		$	421		$	(29,355	)	$	32,319		$	258,637

The Company does not have operating segments other than those reported. Parent Company financial information is included in the Other category above and represents the overhead function rather than an operating segment. Parent Company's net interest income is comprised of interest income from federal funds sold and investment securities.

Note 3

Earnings (Loss) Per Common Share

The following discloses the calculation of basic and diluted earnings (loss) per common share for the three and nine months ended September 30, 2002 and 2001. Stock options outstanding as of September 30, 2002 and 2001 are 573,073 and 378,678, respectively. Stock options issued, which were not included in the calculation of diluted earnings per share because the options' exercise prices were greater than the average market price, were 474,488 for the three months ended September 30, 2002. Because the Company has net losses for the nine months ended September 30, 2002 and for the three months and nine months ended September 30, 2001, all stock options issued have an anti-dilutive effect and, therefore, have been excluded from the earnings per share calculation for those respective periods.

	Three Months Ended September 30,
	2002		2001
	(Dollars in thousands)
Net income (loss)	$	429	$	(706	)
Dividends to preferred shareholders		124		128

Net income (loss) to common shareholders		305		(834	)
Weighted average common shares for basic calculation		10,044,345		4,256,797
Weighted average common shares for diluted calculation		10,142,930		4,256,797
Basic and diluted earnings (loss) per common share	$	0.03	$	(0.20	)

	Nine Months Ended September 30,
	2002			2001
	(Dollars in thousands)
Net loss	$	(738	)	$	(2,274	)
Dividends to preferred shareholders		371			384

Net loss to common shareholders		(1,109	)		(2,658	)
Weighted average common shares for basic and diluted calculation		7,243,053			4,255,432
Basic and diluted loss per common share	$	(0.15	)	$	(0.62	)

Note 4

Adoption of New Accounting Standards

In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 discontinues the practice of amortizing goodwill and requires that goodwill be evaluated at least annually for impairment by comparing its fair value with its recorded amount and written down when appropriate. SFAS No. 142 requires that other intangible assets that have been separately identified and accounted for continue to be amortized over a determinable useful life. SFAS No. 142 also requires disclosure of the changes in the carrying amounts of goodwill from period to period, the carrying amounts of intangible assets by major intangible asset class for those subject to and not subject to amortization, and the estimated intangible asset amortization expense for the next five years. The Company adopted SFAS No. 142 as of January 1, 2002, and, therefore, discontinued the amortization of goodwill on January 1, 2002. The Company has evaluated goodwill for impairment as specified under SFAS No. 142 and determined that goodwill under this statement is not impaired. Information on the Company's intangible assets is contained in the table below.

	September 30, 2002					December 31, 2001
	Gross Carrying Value		Accumulated Amortization			Gross Carrying Value		Accumulated Amortization
	(Dollars in thousands)
Amortizable core deposit intangible	$	102	$	(102	)	$	102	$	(80	)
Unamortizable goodwill (1)		646		—			646		—

	Core Deposit Intangible		Goodwill
Amortization expense:
Three months ended September 30, 2002	$	—	$	—
Nine months ended September 30, 2002		22		—
Three months ended September 30, 2001	$	15	$	158
Nine months ended September 30, 2001		45		478
Estimated amortization expense:
Three months ended December 31, 2002	$	—	$	—
For the years ended December 31,
2003		—		—
2004		—		—
2005		—		—
2006		—		—
2007		—		—

	Three months ended Sept. 30,					Nine months ended Sept. 30,
	2002		2001			2002			2001
Reported net income (loss) to common shareholders	$	305	$	(834	)	$	(1,109	)	$	(2,658	)
Add: goodwill amortization		—		158			—			478

Adjusted net income (loss)		305		(676	)		(1,109	)		(2,180	)
Reported basic and diluted earnings (loss) per share	$	0.03	$	(0.20	)	$	(0.15	)	$	(0.62	)
Add: goodwill amortization per share		—		0.04			—			0.11

Adjusted basic and diluted earnings (loss) per share	$	0.03	$	(0.16	)	$	(0.15	)	$	(0.51	)

(1): In December 2001, the Company wrote down goodwill by $8.3 million.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

General

The following presents management's discussion and analysis of our consolidated financial condition as of September 30, 2002 and December 31, 2001 and results of operations for the three and nine months ended September 30, 2002 and September 30, 2001. This discussion should be read in conjunction with our unaudited consolidated financial statements and the notes thereto appearing elsewhere in this report.

Critical Accounting Policies; Allowance for Loan Losses

Our policy for the allowance for loan loss calculation is to maintain the allowance at a level that represents the best estimate of known and inherent losses in the loan portfolio. Both the amount of the provision and the level of the allowance for loan losses are impacted by many factors, including general economic conditions, actual and expected credit losses, historical trends and specific conditions of the individual borrower. As a part of our analysis, we use comparative peer group data, duration factors and qualitative factors to support our estimates. The loan loss provision was $95,000 and $134,000 for the three and nine months ended September 30, 2002 and $190,000 and $375,000 for the three and nine months ended September 30, 2001. The allowance for loan losses decreased slightly to $3.07 million as of September 30, 2002 from $3.10 million at December 31, 2001. The ratio of the allowance for loan losses to gross loans at September 30, 2002 was 1.42% compared to 1.55% at December 31, 2001. Additional information on the allowance for loan losses and provision expense can be found below under "Results of Operations".

Credit losses are an inherent part of our business. Although we believe the methodologies for determining the allowance for loan losses and the current level of the allowance are adequate, it is possible that there may be unidentified losses in the portfolio that may become evident only at a future date. Additional provisions for such losses, if necessary, would negatively impact earnings and would be recorded in the Commercial Banking segment.

We categorize our loans into one of five pools: commercial and industrial, commercial real estate, home equity lines of credit, residential mortgages, and consumer loans. Peer group annual loss factors are applied to all pools and are adjusted by the projected duration of the loan pool and by the qualitative factors mentioned above. The indicated loss factors resulting from this analysis are applied to each of the loan pools to determine a reserve level for each of the five pools of loans. In addition, we individually assign loss factors to all loans that have been identified as having loss attributes, as indicated by deterioration in the financial condition of the borrower or a decline in underlying collateral values. Since we have limited historical data on which to base loss factors for classified loans, we apply a 5% loss factor to all special mention loans and a 15% loss factor to all substandard loans (in accordance with regulatory guidelines).

Financial Condition

Total assets were $446.8 million at September 30, 2002 compared to $279.6 million at December 31, 2001, an increase of $167.2 million or 59.8% due primarily to higher cash equivalents and investments. Investment securities available-for-sale increased by $103.8 million to $137.9 million at September 30, 2002 compared to $34.1 million at December 31, 2001 (see Table 1 for details of the investment securities available-for-sale portfolio). Loans receivable, net of fees, increased by $15.5 million to $216.4 million at September 30, 2002 from $200.9 million at December 31, 2001 (see Table 2 for loan portfolio details). Total deposits increased by $157.7 million to $403.7 million at September 30, 2002 compared to $246.0 million at December 31, 2001 (see Table 3 for certificates of deposit of $100,000 or more) and total borrowings decreased by $8.8 million to $1.0 million at September 30, 2002 from $9.8 million at December 31, 2001. Deposits increased primarily in the retail

money market accounts and certificates of deposit categories due to the results of our advertising program. Total cash and cash equivalents increased to $86.9 million at September 30, 2002 from $34.5 million at December 31, 2001. The increase in cash and cash equivalents was primarily the result of increased deposit balances not yet invested as loans or securities by September 30, 2002. Shareholders' equity at September 30, 2002 was $40.7 million compared to $20.6 million at December 31, 2001, due primarily to our successful second quarter 2002 stock rights and public offerings which raised $18.5 million in new capital. Changes in the unrealized gain on investment securities portfolio amounting to $2.7 million more than offset the dividends on preferred stock and the net loss for the period. Book value per common share on September 30, 2002 was $3.38 compared to $3.21 on December 31, 2001.

Results of Operations

Net income before preferred dividends for the three months ended September 30, 2002 was $429,000, an improvement of $1,135,000 when compared to the same period of 2001, due to the impact of higher earning assets and reduced operating expenses. Net loss before preferred dividends for the nine months ended September 30, 2002 was $738,000, an improvement of $1,536,000 compared to the same period of the 2001. Our writedown of $1,660,000 of a Worldcom bond in the second quarter contributed to the loss for the nine months ended September 30, 2002.

Dividends to preferred shareholders were $124,000 and $371,000 for the three and nine months ended September 30, 2002 compared to $128,000 and $384,000 for the same periods in 2001. Net income to common shareholders for the three months ended September 30, 2002 was $305,000 and the net loss to common shareholders was $1,109,000 for the nine months ended September 30, 2002, as compared to losses of $834,000 and $2,658,000, respectively, for the three and nine months ended September 30, 2001. Basic and diluted earnings per common share increased by $0.23 per common share to $0.03 as compared to a loss of $0.20 for the three months ended September 30, 2002 and 2001, respectively. Basic and diluted loss per common share for the nine months ended September 30, 2002 was $0.15, an improvement of $0.47 when compared to the nine months ended September 30, 2001.

Return on average assets for the three and nine months ended September 30, 2002 was 0.41% and (0.27%), respectively, compared to (1.15%) and (1.30%) for the three and nine months ended September 30, 2001, respectively. Return on average equity for the three and nine months ended September 30, 2002 was 4.33% and (3.25%), respectively, compared to (8.77%) and (9.20%) for the three and nine months ended September 30, 2001, respectively.

Net interest income is our primary source of revenue and represents the difference between interest and fees earned on interest-bearing assets and the interest paid on deposits and other interest-bearing liabilities. Net interest income for the three months ended September 30, 2002 was $2,842,000 compared to $2,389,000 for the same period ended September 30, 2001, an increase of 19.0%. Net interest income for the nine months ended September 30, 2002 was $7,875,000 compared to $6,648,000 of the same period ended September 30, 2001, an increase of 18.5% due primarily to the impact of higher earning assets.

Our net interest margin for the three and nine months ended September 30, 2002 was 2.86% and 3.05%, respectively, as compared to 4.34% and 4.26% for the three and nine months ended September 30, 2001, respectively. The decrease in the margin can be attributed to the change in the mix of earning assets towards lower yielding investments, and also to the mix of interest-bearing liabilities and lower overall interest rates between September 2001 and September 2002. Tables 4, 4a, 5 and 5a present an analysis of average interest-earning assets, interest-bearing liabilities and demand deposits with the related components of interest income and interest expense.

Provision for loan losses for the three and nine months ended September 30, 2002 was $95,000 and $134,000, respectively, as compared to a provision of $190,000 and $375,000 for the three and nine months ended September 30, 2001. The decrease in provision is primarily driven by the reduction in our commercial loan portfolios and increases in our residential real estate loans and refinement of our loan loss reserve methodology during the fourth quarter of 2001. Our allowance for loan losses at September 30, 2002 was $3.07 million compared to $3.10 million at December 31, 2001. The ratio of the allowance for loan losses to total loans at September 30, 2002 was 1.42% compared to a ratio of 1.55% at December 31, 2001. Tables 6 and 7 portray the components and the allocation of the allowance for loan losses.

Non-interest income for the three months ended September 30, 2002 was $728,000 compared to $854,000 for the three months ended September 30, 2001, a decrease of 14.8%. For the nine months September 30, 2002, non-interest income was $2,166,000 compared to $2,476,000 for the same period ended September 30, 2001, a decrease of 12.5%. The decrease in non-interest income was primarily due to decreases in investment fee income of $284,000 and $806,000, respectively, for the three and nine months ended September 30, 2002 as compared to the three and nine months ended September 30, 2001. These decreases were partially offset by gains on investment securities and increases in service charges on deposit accounts and rental income from the subleases of excess space in various locations.

Non-interest expense for the three and nine months ended September 30, 2002 totaled $3,046,000 and $10,645,000 compared to $3,759,000 and $11,023,000 for the three and nine months ended September 30, 2001, due primarily to lower staff related expenses. Due to the adoption of SFAS No. 142, amortization of intangibles decreased by $173,000 for the three months ended September 30, 2002 compared to the same period in 2001 and by $501,000 for the year to date September 30, 2002 compared to the year to date September 30, 2001.

We have not recorded income tax expense or benefit due to the existence of net losses for the nine months ended September 30, 2002 and all prior years of operations. We have net deferred tax assets, including net operating loss carryforwards, all of which have a full valuation allowance as of September 30, 2002. A valuation allowance is established against a deferred tax asset when, in the judgment of management, it is more likely than not that such deferred tax assets will be realized. The benefit of our deferred tax assets will only be recognized when it becomes more likely than not that they will be realized.

Business Segment Operations

We provide banking and non-banking financial services and products through our subsidiaries. Management operates and reports on the results of our operations through two business segments, banking and investment advisory services.

Banking

The banking segment provides comprehensive banking services to small businesses and individuals through multiple delivery channels. Services offered include commercial and consumer lending, deposit products, direct banking via the internet or telephone, and the funding of small business receivables through the Business Manager product.

For the three months ended September 30, 2002 the commercial banking segment had net income of $495,000 and for the nine months ended September 30, 2002 net losses of $312,000, compared to net losses of $124,000 and $638,000 for the three and nine months ended September 30, 2001. The improvement in earnings is a result of higher earning assets and lower operating expenses. As of September 30, 2002, total assets were $443.5 million, while loans receivable, net of fees, were

$216.4 million and deposits were $403.7 million. As of September 30, 2001, total assets were $255.3 million, loans receivable, net of fees, were $196.7 million and deposits were $212.7 million.

Investment Advisory Services

The investment advisory services segment offers financial and estate planning services, centered on a group of products provided through a strategic alliance with Legg Mason Financial Partners, a wholly owned subsidiary of Legg Mason, Inc. Operations for this segment began February 1, 1999.

For the three and nine months ended September 30, 2002, the investment advisory services segment had net losses of $35,000 and $158,000, respectively. As of September 30, 2002, total assets were $332,000 and total assets under management were $102.2 million. For the three months ended September 30, 2001, the net loss was $6,000 and for the nine months ended September 30, 2001, the net loss was $33,000. As of September 30, 2001, total assets were $421,000 and total assets under management were $133.8 million. Fee income for the three and nine months ended September 30, 2002 decreased as compared to the same three and nine month period of 2001, due primarily to reduced transaction activity.

Capital Resources

Shareholders' equity at September 30, 2002 was $40.7 million compared to $20.6 million at December 31, 2001. During the second quarter of 2002, we completed a stock rights and public offerings which raised $18.5 million in new capital and increased the total number of outstanding shares to 10,044,345 at September 30, 2002 as compared to 4,294,323 at December 31, 2001. Changes in the unrealized gain on investment securities portfolio totaling $2.7 million more than offset dividends paid on preferred stock and the net loss for the period. At September 30, 2002, our tier 1 and total risk-based capital ratios were 14.0% and 15.2%, respectively. At December 31, 2001, our tier 1 and total risk-based capital ratios were 9.0% and 10.4%, respectively. Table 8 provides additional information on our capital resources.

Liquidity

Liquidity management is an important element in determining our ability to meet normal deposit withdrawals while also providing for the credit needs of customers. At September 30, 2002, cash and cash equivalents and investment securities available-for-sale totaled $224.9 million or 50.3% of total assets compared to $68.6 million or 24.5% of total assets at December 31, 2001. The improvement in liquidity as compared to prior year is due to the availability of funds from the recent capital raising, as well as higher deposit levels resulting from our advertising program. Management is committed to maintaining liquidity at a level sufficient to protect depositors, provide for reasonable growth, and fully comply with all regulatory requirements.

Interest Rate Sensitivity

Asset/liability management involves the monitoring of our sensitivity to interest rate movements. In order to measure the effect of interest rates on our net interest income, management takes into consideration the expected cash flows from the loan and securities portfolios and the expected magnitude of the repricing of specific asset and liability categories. Management evaluates interest sensitivity risk and then formulates guidelines to manage this risk based upon its outlook regarding the economy, forecasted interest rate movements and other business factors. Management's goal is to maximize and stabilize the net interest margin by limiting exposure to interest rate changes.

The data in Table 9 reflects the repricing or expected maturities of various assets and liabilities as of September 30, 2002. This "gap" analysis represents the difference between interest sensitive assets and liabilities in a specific time interval. The interest sensitivity gap analysis presents a position that

existed at one particular point in time, and assumes that assets and liabilities with similar repricing characteristics will reprice at the same time and to the same degree.

Forward Looking Statements

This Quarterly Report on Form 10-QSB contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are not historical facts, but rather are predictions and generally can be identified by use of statements that include phrases such as "believe," "expect," "anticipate," "estimate," "intend," "plan," "foresee" or other words or phrases of similar import. Similarly, statements that describe our future financial condition or results of operations, objectives, strategies, plans, goals or future performance and business also are forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause our actual results to differ materially from those currently anticipated in these forward-looking statements. In light of these risks and uncertainties, the forward-looking events might or might not occur.

Important factors that could cause actual results to differ materially from those suggested by these forward-looking statements, and could adversely affect our future financial performance, include those referred to in our Annual Report on Form 10-KSB for the year ended December 31, 2001.

Table 1.

Cardinal Financial Corporation and Subsidiaries
Investment Securities Available-for-Sale
As of September 30, 2002 and December 31, 2001
(Dollars in thousands)

			Par Value		Amortized Cost		Fair Value		Unrealized Gain/(Loss)			Average Yield
As of September 30, 2002
U.S. government agencies and enterprises
	One to five years		$	23,000	$	22,988	$	23,256	$	268		3.90	%

		Total U.S. government agencies	$	23,000	$	22,988	$	23,256	$	268		3.90	%
Mortgage-backed securities
	Within one year		$	3,784	$	3,841	$	3,884	$	43		3.61	%
	One to five years			97,595		99,386		101,458		2,072		5.16	%
	Five to ten years			5,962		6,073		6,183		110		5.85	%
	After ten years			342		360		360		—		9.69	%

		Total mortgage-backed securities	$	107,683	$	109,660	$	111,885	$	2,225		5.16	%
Corporate bonds
	One to five years		$	2,000	$	340	$	260	$	(80	)	0.00	%

		Total corporate bonds	$	2,000	$	340	$	260	$	(80	)	0.00	%

Treasury bonds
	One to five years		$	2,500	$	2,509	$	2,544	$	35		2.67	%

		Total treasury bonds	$	2,500	$	2,509	$	2,544	$	35		2.67	%

		Total investment securities available-for-sale	$	135,183	$	135,497	$	137,945	$	2,448		4.82	%

			Par Value		Amortized Cost		Fair Value		Unrealized Gain/(Loss)			Average Yield
As of December 31, 2001
U.S. government agencies and enterprises
	One to five years		$	3,000	$	2,985	$	2,950	$	(35	)	4.15	%
	Five to ten years			1,500		1,516		1,508		(8	)	4.67	%

		Total U.S. government agencies	$	4,500	$	4,501	$	4,458	$	(43	)	4.32	%

Mortgage-backed securities
	Within one year		$	182	$	182	$	183	$	1		2.55	%
	One to five years			11,210		11,456		11,383		(73	)	5.22	%
	Five to ten years			5,804		5,927		5,865		(62	)	5.79	%
	After ten years			4,849		4,965		4,926		(39	)	5.96	%

		Total mortgage-backed securities	$	22,045	$	22,530	$	22,357	$	(173	)	5.51	%

Corporate bonds
	One to five years		$	6,000	$	6,154	$	6,114	$	(40	)	5.42	%
	Five to ten years			1,000		986		969		(17	)	6.98	%

		Total corporate bonds	$	7,000	$	7,140	$	7,083	$	(57	)	5.64	%

Treasury bonds
	Within one year		$	250	$	250	$	249	$	(1	)	1.87	%

		Total treasury bonds	$	250	$	250	$	249	$	(1	)	1.87	%

		Total investment securities available-for-sale	$	33,795	$	34,421	$	34,147	$	(274	)	5.36	%

Table 2.

Cardinal Financial Corporation and Subsidiaries
Loans Receivable
As of September 30, 2002 and December 31, 2001
(Dollars in thousands)

	September 30, 2002					December 31, 2001
Commercial	$	52,717		24.37	%	$	57,665		28.71	%
Real estate—commercial		95,699		44.24	%		87,116		43.37	%
Real estate—construction		6,224		2.88	%		6,397		3.18	%
Real estate—residential		25,329		11.71	%		14,469		7.20	%
Home equity lines		24,776		11.45	%		21,299		10.60	%
Consumer		11,592		5.35	%		13,941		6.94	%

Gross loans	$	216,337		100.00	%	$	200,887		100.00	%
Add: unearned income, net		18					24
Less: allowance for loan losses		(3,073	)				(3,104	)

Total loans, net	$	213,282				$	197,807

Table 3.

Cardinal Financial Corporation and Subsidiaries
Certificates of Deposit of $100,000 or More
As of September 30, 2002
(Dollars in thousands)

	September 30, 2002
Maturities:
Three months or less	$	8,356
Over three months through six months		8,918
Over six months through twelve months		19,675
Over twelve months		35,634

	$	72,583

Table 4.

Cardinal Financial Corporation and Subsidiaries
Average Balance Sheets and Interest Rates on Earning Assets and Interest—Bearing Liabilities
For the Three Months Ended September 30, 2002, 2001 and 2000
(Dollars in thousands)

			2002							2001							2000
			Average Balance			Interest Income/ Expense		Rate		Average Balance			Interest Income/ Expense		Rate		Average Balance			Interest Income/ Expense		Rate
Assets
Interest-earning assets:
Loans:
	Commercial		$	49,780		$	893	7.18	%	$	53,237		$	1,115	8.38	%	$	33,601		$	821	9.77	%
	Real estate—commercial			94,614			1,887	7.98	%		77,165			1,673	8.67	%		33,901			633	7.47	%
	Real estate—construction			6,675			100	5.96	%		6,044			127	8.40	%		3,373			85	10.12	%
	Real estate—residential			19,103			369	7.72	%		17,864			384	8.59	%		19,746			460	9.33	%
	Home equity lines			24,268			263	4.30	%		18,755			287	6.12	%		8,253			183	8.85	%
	Consumer			11,884			225	7.51	%		14,911			293	7.86	%		9,635			216	8.95	%

		Total loans		206,324			3,737	7.24	%		187,976			3,879	8.25	%		108,509			2,398	8.84	%

Investment securities available for sale				127,307			1,471	4.62	%		5,788			95	6.57	%		6,310			99	6.30	%
Other investments				1,199			17	5.67	%		1,319			22	6.67	%		1,036			16	6.24	%
Federal funds sold				62,104			260	1.66	%		25,168			218	3.44	%		22,906			391	6.85	%

Total interest-earning assets and interest income				396,934			5,485	5.53	%		220,251			4,214	7.65	%		138,761			2,904	8.37	%

Non-interest earning assets:
Cash and due from banks				19,861							10,706							5,711
Premises and equipment, net				4,678							5,572							4,678
Goodwill and other intangibles				646							9,167							3,300
Accrued interest and other assets				3,500							1,836							687
Allowance for loan losses				(3,049	)						(2,138	)						(1,278	)

Total assets			$	422,570						$	245,394						$	151,859

Liabilities and Shareholders' Equity
Interest—bearing liabilities:
Interest—bearing deposits:
	Interest checking			130,110			904	2.76	%		16,128			74	1.84	%		6,244			33	2.10	%
	Money markets			32,019			151	1.87	%		26,350			185	2.82	%		16,169			136	3.37	%
	Statement savings			4,287			13	1.24	%		4,502			24	2.16	%		2,216			16	2.97	%
	Certificates of deposit			150,658			1,535	4.04	%		103,439			1,420	5.51	%		62,115			966	6.24	%

		Total interest—bearing deposits		317,074			2,603	3.26	%		150,419			1,703	4.49	%		86,744			1,151	5.32	%

Other borrowed funds				4,065			40	3.93	%		10,912			122	4.45	%		6,875			117	6.83	%

Total interest-bearing liabilities and interest expense				321,139			2,643	3.27	%		161,331			1,825	4.50	%		93,619			1,268	5.43	%

Noninterest-bearing liabilities:
Demand deposits				60,161							49,337							27,053
Other liabilities				1,659							2,500							1,169
Preferred shareholders' equity				6,825							7,057							2,378
Common shareholders' equity				32,786							25,169							27,640

Total liabilities and shareholders' equity			$	422,570						$	245,394						$	151,859

Net interest income and net interest margin						$	2,842	2.86	%				$	2,389	4.34	%				$	1,636	4.72	%

Table 4a.

Cardinal Financial Corporation and Subsidiaries
Rate and Volume Analysis (Tax Equivalent Basis)
(Dollars in thousands)

			Three Months Ended September 30, 2002 Compared to 2001									Three Months Ended September 30, 2001 Compared to 2000
			Average Volume			Average Rate			Increase (Decrease)			Average Volume			Average Rate			Increase (Decrease)
Interest income:
Loans:
	Commercial		$	(72	)	$	(150	)	$	(222	)	$	480		$	(186	)	$	294
	Real estate—commercial			379			(165	)		214			808			232			1,040
	Real estate—construction			14			(41	)		(27	)		68			(26	)		42
	Real estate—residential			27			(42	)		(15	)		(43	)		(33	)		(76	)
	Home equity lines			84			(108	)		(24	)		234			(130	)		104
	Consumer			(60	)		(8	)		(68	)		119			(42	)		77

		Total loans		372			(514	)		(142	)		1,666			(185	)		1,481

Investment securities available for sale				1,995			(619	)		1,376			(8	)		4			(4	)
Other investments				(2	)		(3	)		(5	)		5			1			6
Federal funds sold				321			(279	)		42			39			(212	)		(173	)

	Total interest income			2,686			(1,415	)		1,271			1,702			(392	)		1,310
Interest expense:
Interest—bearing deposits:
	Interest checking			527			303			830			52			(11	)		41
	Money markets			40			(74	)		(34	)		87			(38	)		49
	Statement savings			(1	)		(10	)		(11	)		17			(9	)		8
	Certificates of deposit			656			(541	)		115			650			(196	)		454

		Total interest—bearing deposits		1,222			(322	)		900			806			(254	)		552

Other borrowed funds				(77	)		(5	)		(82	)		69			(64	)		5
	Total interest expense			1,145			(327	)		818			875			(318	)		557

Net interest income			$	1,541		$	(1,088	)	$	453		$	827		$	(74	)	$	753

Table 5.

Cardinal Financial Corporation and Subsidiaries
Average Balance Sheets and Interest Rates on Earning Assets and Interest—Bearing Liabilities
For the Nine Months Ended September 30, 2002, 2001 and 2000
(Dollars in thousands)

			2002							2001							2000
			Average Balance			Interest Income/ Expense		Rate		Average Balance			Interest Income/ Expense		Rate		Average Balance			Interest Income/ Expense		Rate
Assets
Interest-earning assets:
Loans:
	Commercial		$	52,156		$	2,788	7.13	%	$	50,710		$	3,345	8.80	%	$	27,978		$	1,996	9.51	%
	Real estate—commercial			89,634			5,408	8.04	%		67,475			4,445	8.78	%		30,020			1,696	7.53	%
	Real estate—construction			6,185			282	6.07	%		5,538			374	9.01	%		1,990			146	9.78	%
	Real estate—residential			17,448			1,033	7.90	%		18,062			1,133	8.36	%		15,068			1,012	8.96	%
	Home equity lines			23,270			741	4.26	%		17,172			896	6.96	%		6,078			393	8.62	%
	Consumer			12,864			715	7.43	%		14,965			881	7.85	%		9,428			566	8.01	%

		Total loans		201,557			10,967	7.26	%		173,922			11,074	8.49	%		90,562			5,809	8.55	%

Investment securities available for sale				91,846			3,284	4.77	%		5,325			285	7.14	%		5,136			243	6.30	%
Other investments				1,197			53	5.90	%		1,427			66	6.17	%		971			49	6.68	%
Federal funds sold				49,428			613	1.66	%		27,223			926	4.55	%		19,245			961	6.66	%

Total interest-earning assets and interest income				344,028			14,917	5.78	%		207,897			12,351	7.92	%		115,914			7,062	8.12	%

Non-interest earning assets:
Cash and due from banks				16,955							10,207							4,499
Premises and equipment, net				4,843							5,649							4,496
Goodwill and other intangibles				652							9,337							1,108
Accrued interest and other assets				2,003							1,723							1,209
Allowance for loan losses				(3,051	)						(2,038	)						(999	)

Total assets			$	365,430						$	232,775						$	126,227

Liabilities and Shareholders' Equity
Interest—bearing liabilities:
Interest—bearing deposits:
	Interest checking			104,351			2,252	2.89	%		14,188			203	1.93	%		4,264			73	2.32	%
	Money markets			28,229			424	2.01	%		24,485			617	3.39	%		12,666			336	3.57	%
	Statement savings			4,275			40	1.24	%		4,396			88	2.70	%		1,096			26	3.23	%
	Certificates of deposit			131,106			4,118	4.20	%		99,781			4,427	5.98	%		48,564			2,193	6.08	%

		Total interest—bearing deposits		267,961			6,834	3.41	%		142,850			5,335	4.99	%		66,590			2,628	5.31	%

Other borrowed funds				6,802			208	4.09	%		9,817			368	5.02	%		6,261			309	6.55	%

Total interest-bearing liabilities and interest expense				274,763			7,042	3.43	%		152,667			5,703	5.00	%		72,851			2,937	5.43	%

Noninterest-bearing liabilities:
Demand deposits				57,915							44,566							21,517
Other liabilities				2,505							2,593							1,917
Preferred shareholders' equity				6,825							7,057							798
Common shareholders' equity				23,422							25,892							29,144

Total liabilities and shareholders' equity			$	365,430						$	232,775						$	126,227

Net interest income and net interest margin						$	7,875	3.05	%				$	6,648	4.26	%				$	4,125	4.74	%

Table 5a.

Cardinal Financial Corporation and Subsidiaries
Rate and Volume Analysis (Tax Equivalent Basis)
(Dollars in thousands)

			Nine Months Ended September 30, 2002 Compared to 2001									Nine Months Ended September 30, 2001 Compared to 2000
			Average Volume			Average Rate			Increase (Decrease)			Average Volume		Average Rate			Increase (Decrease)
Interest income:
Loans:
	Commercial		$	95		$	(652	)	$	(557	)	$	1,622	$	(273	)	$	1,349
	Real estate—commercial			1,460			(497	)		963			2,116		633			2,749
	Real estate—construction			44			(136	)		(92	)		260		(32	)		228
	Real estate—residential			(39	)		(61	)		(100	)		202		(81	)		121
	Home equity lines			317			(472	)		(155	)		715		(212	)		503
	Consumer			(123	)		(43	)		(166	)		332		(17	)		315

		Total loans		1,754			(1,861	)		(107	)		5,247		18			5,265

Investment securities available for sale				4,631			(1,632	)		2,999			9		33			42
Other investments				(11	)		(2	)		(13	)		23		(6	)		17
Federal funds sold				755			(1,068	)		(313	)		397		(432	)		(35	)

	Total interest income			7,129			(4,563	)		2,566			5,676		(387	)		5,289
Interest expense:
Interest—bearing deposits:
	Interest checking			1,300			749			2,049			172		(42	)		130
	Money markets			95			(288	)		(193	)		315		(34	)		281
	Statement savings			(2	)		(46	)		(48	)		80		(18	)		62
	Certificates of deposit			1,400			(1,709	)		(309	)		2,329		(95	)		2,234

		Total interest—bearing deposits		2,793			(1,294	)		1,499			2,896		(189	)		2,707

Other borrowed funds				(113	)		(47	)		(160	)		174		(115	)		59
	Total interest expense			2,680			(1,341	)		1,339			3,070		(304	)		2,766

Net interest income			$	4,449		$	(3,222	)	$	1,227		$	2,606	$	(83	)	$	2,523

Table 6.

Cardinal Financial Corporation and Subsidiaries
Allowance for Loan Losses
For the Nine Months Ended September 30, 2002 and 2001
(Dollars in thousands)

		2002			2001
Beginning balance, January 1		$	3,104		$	1,900
Provision for loan losses			134			375
Transfer to bank's liability on unfunded commitments			(74	)		—
Loans charged off:
	Commercial		(63	)		—
	Real estate—commercial		—			—
	Real estate—construction		—			—
	Real estate—residential		—			—
	Home equity lines		—			—
	Consumer		(41	)		—

	Total loans charged off		(104	)		—
Recoveries:
	Commercial		2			2
	Real estate—commercial		—			—
	Real estate—construction		—			—
	Real estate—residential		—			—
	Home equity lines		—			—
	Consumer		11			—

	Total recoveries		13			2
Net (charge-offs) recoveries			(91	)		2
Ending balance		$	3,073		$	2,277

		September 30, 2002			September 30, 2001
Loans:
	Balance at period end	$	216,337		$	196,668
	Allowance for loan losses to period end loans receivable		1.42	%		1.16	%

Table 7.

Cardinal Financial Corporation and Subsidiaries
Allocation of the Allowance for Loan Losses
As of September 30, 2002 and December 31, 2001
(Dollars in thousands)

	September 30, 2002			December 31, 2001
	Amount		% of Total*	Amount		% of Total*
Commercial	$	948	24.37%	$	1,149	28.71%
Real estate—commercial		1,342	44.24%		1,270	43.37%
Real estate—construction		173	2.88%		34	3.18%
Real estate—residential		190	11.71%		98	7.20%
Home equity lines		198	11.45%		176	10.60%
Consumer		222	5.35%		377	6.94%

Total allowance for loan losses	$	3,073	100.00%	$	3,104	100.00%

*: Percentage of loan type to the total loan portfolio.

Table 8.

Cardinal Financial Corporation and Subsidiaries
Capital Components
As of September 30, 2002 and December 31, 2001
(Dollars in thousands)

	Actual				For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount			Ratio		Amount			Ratio
As of September 30, 2002
Total risk based capital/ Total capital to risk-weighted assets	$	40,708	15.21	%	$	21,407	³	8.00	%	$	26,759	³	10.00	%
Tier I capital/ Tier I capital to risk-weighted assets		37,636	14.06	%		10,704	³	4.00	%		16,055	³	6.00	%
Total risk based capital/ Total capital to average assets		40,708	9.63	%		16,903	³	4.00	%		13,380	³	5.00	%

As of December 31, 2001
Total risk based capital/ Total capital to risk-weighted assets	$	23,333	10.42	%	$	17,909	³	8.00	%	$	22,387	³	10.00	%
Tier I capital/ Tier I capital to risk-weighted assets		20,230	9.04	%		8,955	³	4.00	%		13,432	³	6.00	%
Total risk based capital/ Total capital to average assets		23,333	8.57	%		10,891	³	4.00	%		13,614	³	5.00	%

Table 9.

Cardinal Financial Corporation and Subsidiaries
Interest Rate Sensitivity Gap Analysis
As of September 30, 2002
(Dollars in thousands)

	Immediate Repricing			2-90 Days			91-180 Days			181-365 Days			1-3 Years			Over 3 Years			TOTAL
Assets
Investment securities available-for-sale and other investments	$	—		$	7,382		$	6,018		$	13,009		$	65,206		$	47,593		$	139,208

Federal funds sold		61,186			—			—			—			—			—			61,186

Loans
Commercial & industrial		15,152			5,761			3,722			8,358			45,320			70,102			148,416
Residential		108			249			294			2,129			7,821			14,729			25,329
Home equity lines		4,471			20,305			—			—			—			—			24,776
Construction		4,770			13			6			12			55			1,368			6,224
All other		1,706			555			397			711			2,416			5,806			11,592

Total Gross Loans		26,207			26,884			4,420			11,210			55,612			92,005			216,337

Total Earning Assets		87,393			34,266			10,438			24,219			120,818			139,598			416,731

Cumulative Rate Sensitive Assets		87,393			121,659			132,097			156,315			277,133			416,731

Liabilities
Deposits
Noninterest-bearing demand		—			—			—			—			—			73,474			73,474
Interest-bearing transaction accounts		33,666			16,833			16,833			16,833			16,833			67,332			168,331
Certificates of deposit—fixed		104			8,611			5,487			22,485			50,451			16,209			103,347
Certificates of deposit—no penalty		116			7,395			9,973			16,404			24,628			—			58,516

Total Deposits		33,886			32,839			32,293			55,722			91,912			157,015			403,668

Other borrowed funds		—			—			—			1,000			—			—			1,000

Total Deposits & Other Borrowed Funds		33,886			32,839			32,293			56,722			91,912			157,015			404,668

Cumulative Rate Sensitive Liabilities	$	33,886		$	66,725		$	99,018		$	155,741		$	247,653		$	404,668

Gap	$	53,507		$	1,427		$	(21,855	)	$	(32,504	)	$	28,906		$	(17,417	)
Cumulative Gap		53,507			54,934			33,079			575			29,480			12,063
Gap/ Total Assets		11.98	%		0.32	%		-4.89	%		-7.27	%		6.47	%		-3.90	%
Cumulative Gap/ Total Assets		11.98	%		12.29	%		7.40	%		0.13	%		6.60	%		2.70	%
Rate Sensitive Assets/ Rate Sensitive Liabilities		2.58	x		1.04	x		0.32	x		0.43	x		1.31	x		0.89	x
Cumulative Rate Sensitive Assets/ Rate Sensitive Liabilities		2.58	x		1.82	x		1.33	x		1.00	x		1.12	x		1.03	x

Item 3. Controls and Procedures

Based upon an evaluation by our Chief Executive Officer and Chief Financial Officer within 90 days prior to the filing date of this Quarterly Report on Form 10-QSB, they have concluded that our disclosure controls and procedures, as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934, as amended, are effective in ensuring that all material information required to be filed in this Quarterly Report has been made known to them in a timely fashion.

There were no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date of the evaluation referred to above.

Part II—Other Information

Item 1. Legal Proceedings

From time to time, the Company is a party to legal proceedings in the ordinary course of business. However, the Company is not engaged in any legal proceedings of a material nature at the present time.

Item 2. Changes in Securities

(a): None
(b): None
(c): None
(d): Not applicable

Item 3. Defaults Upon Senior Securities

(a): None
(b): None

Item 4. Submission of Matters to a Vote of Security Holders

The Company's Annual Meeting of Shareholders was held on July 22, 2002.

The following persons were elected as directors for terms expiring in the year indicated:

		Votes
Director	Term Expires	Votes
Director	Term Expires	For	Withheld
Nancy K. Falck	2003	8,255,864	178,602
J. Hamilton Lambert	2003	8,214,501	219,965
Jones V. Isaac	2004	8,288,364	146,102
B.G. Beck	2005	8,288,364	146,102
William G. Buck	2005	8,288,364	146,102
Bernard H. Clineburg	2005	8,288,364	146,102
John W. Fisher	2005	8,255,864	178,602
Emad Saadeh	2005	8,288,364	146,102

The following directors have terms of office that continued after the meeting:

Director		Term Expires
Robert M. Barlow		2003
James D. Russo		2003
George P. Shafran		2003
Wayne W. Broadwater		2004
Sidney O. Dewberry		2004
Harold E. Lieding		2004
John H. Rust		2004

The approval of the Cardinal Financial Corporation 2002 Equity Compensation Plan was voted on at the meeting and approved by a vote of 4,507,317 for, 445,230 against, with 605,135 abstentions.

Finally, the shareholders voted on and approved the appointment of KPMG LLP as the Company's independent auditors by a vote of 8,415,648 for, 15,730 against, with 3,088 abstentions.

Item 5. Other Information

None

Item 6. Exhibits and Reports on Form 8-K

(a): The exhibits filed as part of this report are listed below:

3.1 Articles of Incorporation of Cardinal Financial Corporation (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form SB-2, Registration No. 333-82946, filed with the Commission on February 19, 2002 (the "Original Form SB-2")).

3.2 Articles of Amendment to the Articles of Incorporation of Cardinal Financial Corporation, setting forth the designation for the Series A Preferred Stock and other changes (incorporated by reference to Exhibit 3.2 to the Original Form SB-2) and Articles of Amendment to the Articles of Incorporation of Cardinal Financial Corporation, further setting forth the designation for the Series A Preferred Stock and other changes (incorporated by reference to Exhibit 3.2 to the Pre-Effective Amendment No. 1 to Form SB-2, Registration No. 333-82946, filed with the Commission on March 21, 2002 ("Amendment No. 1")).

3.3 Amended Bylaws of Cardinal Financial Corporation (incorporated by reference to Exhibit 3.3 to the Form 10-QSB filed with the Commission on August 14, 2002).

4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Original Form SB-2).

10.1 Employment Agreement, dated as of February 12, 2002, between Cardinal Financial Corporation and Bernard H. Clineburg (incorporated by reference to Exhibit 10.1 to the Original Form SB-2).

10.2 Executive Employment Agreement, dated as of February 12, 2002, between Cardinal Financial Corporation and Carl E. Dodson (incorporated by reference to Exhibit 10.2 to the Original Form SB-2).

10.3 Executive Employment Agreement, dated as of February 12, 2002 between Cardinal Financial Corporation and F. Kevin Reynolds (incorporated by reference to Exhibit 10.4 to the Original Form SB-2).

10.4 Executive Employment Agreement, dated as of February 12, 2002, between Cardinal Financial Corporation and Christopher W. Bergstrom (incorporated by reference to Exhibit 10.5 to the Original Form SB-2).

10.5 Cardinal Financial Corporation 1999 Stock Option Plan, as amended (incorporated by reference to Exhibit 10.7 to the Original Form SB-2).

10.6 Cardinal Financial Corporation 2002 Equity Compensation Plan (incorporated by reference to Exhibit 10.8 to the Form 10-QSB filed with the Commission on August 14, 2002).

99.1 Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.2 Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b): Reports on Form 8-K

On July 8, 2002 the registrant filed a Report on Form 8-K attaching its July 3, 2002 press release concerning a writedown of a Worldcom bond.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report on Form 10-QSB to be signed on its behalf by the undersigned thereunto duly authorized.

		CARDINAL FINANCIAL CORPORATION (Registrant)
Date: November 14, 2002		/s/ BERNARD H. CLINEBURG Bernard H. Clineburg Chairman, President and Chief Executive Officer
Date: November 14, 2002		/s/ JOHN P. HOLLERBACH John P. Hollerbach Executive Vice President and Chief Financial Officer (Principal Financial Officer)

CERTIFICATION

I, Bernard H. Clineburg, Chief Executive Officer of the registrant, certify that:

1. I have reviewed this quarterly report on Form 10-QSB of Cardinal Financial Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

November 14, 2002

/s/ BERNARD H. CLINEBURG

Bernard H. Clineburg,
Chairman, President and
Chief Executive Officer

CERTIFICATION

I, John P. Hollerbach, Chief Financial Officer of the registrant, certify that:

1. I have reviewed this quarterly report on Form 10-QSB of Cardinal Financial Corporation;

b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

November 14, 2002

/s/ JOHN P. HOLLERBACH

John P. Hollerbach,
Executive Vice President and
Chief Financial Officer

QuickLinks

CARDINAL FINANCIAL CORPORATION
INDEX TO FORM 10-QSB

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 3. Controls and Procedures

Part II—Other Information

Item 1. Legal Proceedings

Item 2. Changes in Securities

Item 3. Defaults Upon Senior Securities

Item 4. Submission of Matters to a Vote of Security Holders

Item 5. Other Information

Item 6. Exhibits and Reports on Form 8-K

SIGNATURES
CERTIFICATION
CERTIFICATION